7 Billion Sets of Spectacles
Curiosity, Biases, and The Way Through Which Investors See the World
To see the world in a light which only highlights the positive, the good, or the optimistic point of view is to peer through rose-tinted glasses. I am certain many are aware of this idiom, oft used to convey someone’s unrealistic outlook on life. However unrealistic it may be, I would attest that someone donning spectacles of perpetual pessimism and melancholy to be equally unrealistic. When I was 18, my accounting professor shared an off-hand remark about how we should question everything, even the seemingly insignificant, and make it a conscious habit to do so whenever presented with something new. As youngsters, we are oft conditioned to take materials presented to us as fact. I assume that makes sense to some degree. Why would we question the outcome of 2 plus 2 equalling 4 in our formative years?
For other factoids we blindly take at face value, such as the sky being blue, I would think that questioning this statement bears more fruit. Spoiler, the sky is not blue. Without taking the advice of my undergraduate accounting professor quite so literally, the message behind his remark was that, as adults, it’s a great practice to not take everything at face value; to question whether something is true, why it might be a widely held opinion, whether you believe it if there are any biases at play. Why? Not because one should manifest a sense of rebellion or disbelief about the world but, rather, because it leads to more critical thinking. Most importantly, it leads to more self-directed thought.
How many of your beliefs can you securely say are your own because you took the time to weigh up the myriad of competing perspectives, the benefits, the consequences, and come to your own conclusion? If your answer is “most of them”, then you are either a critical thinker or delusional. In Peter Thiel’s ‘Zero to One’ there is a passage dedicated to the competing visions of nerds (engineers) and salesmen. Put simply, engineers want to build a product which sells itself, and salesmen realise that the world doesn’t work that way. Both parties must exist to build a prosperous business. In this chapter, he remarks that:
“Advertising doesn’t exist to make you buy a product right away; it exists to embed subtle impressions that will drive sales later. Anyone who can’t acknowledge its likely effect on himself is doubly deceived.”
I bring this up because, as much as we may deny it, marketing influences us throughout our lives, incepting the beliefs that we like X brand because of superior quality, or utility. I feel this, viscerally, when shopping for clothing. My rational sense tells me that this plain white Hilfiger polo shirt is no greater than the one I could buy for one-third of the price. Sure, there are some aspects of quality and longevity of the garments that warrant the premium, but not likely enough to warrant paying a 200% premium. As much as I hate myself for succumbing to the marketing machine, I do find this amusing. For me, life is too short to get existential about my apparel consumption, but at least I am aware of my indoctrination.
Politics is perhaps the greatest example of this. In the UK, many simply vote for a party because their family has long voted for that party. Others will vote for a party because they feel it best resembles their position in society. There are those who may be of privilege who vote conservative, the party perceived to be for the “upper classes”, but there may also be those who vote aspirationally. They vote for that same party because they wish to attain gratification through association. I imagine there are a surprising number of people who vote for national leaders based purely on appearance too. The thing that all of this gibberish misses, however, is that most individuals don’t vote for their party because of policy. I am not an openly political person, and as such, I find it whimsical to tie one’s self to a party. I tend to vote for whichever party portrays the best case for their four-year tenure if I vote at all. I believe there is a parable that relates to investing, explaining how most investors spend more time evaluating the prospects of a car, or a kitchen appliance, before purchase than they do a publicly traded business. I highly doubt that many read their party’s manifesto before voting.
A few weeks ago, I had my in-laws visiting from India, whom I respect very much. My partner’s father, a tenured lawyer with an insatiable (with a capital ‘I’) appetite for reading, is someone that I could converse with for days. One discussion, which partially catalysed these thoughts I share today, centred around the scientific method. That is, to observe and question, research, form a hypothesis, experiment, analyse, and conclude.
In Daniel Kahneman’s ‘Thinking Fast and Slow’, he shares a thesis of the dichotomy between two modes of thought. System 1, the fast, instinctive and emotional part of our brains, and System 2, the slower, logical, and more deliberate side. The two exist in tandem because we need to automate certain brain functions in an almost subconscious way. As an example, stereotypes (as negative as they may or may not be) exist because it makes it easier for our brains to make assumptions about the person we are interacting with. Counteracting that subconscious behaviour would require one to hold no prejudices or assumptions about each new person we meet. Put differently, it would require a deliberate decision not to stereotype them (System 2).
As much as I believe this particular example calls for System 2 thinking, there are many others, which do not require a full-blown hypothesis to make a decision. But in instances where there is scope to utilise our System 2 brain, many fail to do so, because not questioning, not researching, and not coming to your own conclusion, is much easier. Say you get a new job in a new part of town. The first time you drive there, you will be focused and attentive, as you are unfamiliar with the route. Within a few weeks, it will become a subconscious act. From System 2 to 1. This is the brain’s natural response to optimise the use of our limited brain power, conserving it for more meaningful tasks. It might be why certain figures like Mark Zuckerberg and Dexter McPherson tend to wear the same clothing every day. It removes the complexity of having to exhaust brainpower on perceptually meaningless tasks.
7 Billions Sets of Spectacles
If there are 7 billion inhabitants of the earth, then there are 7 billion pairs of spectacles through which the world is viewed. I recall joking that a friend of mine, who invests solely in ETFs, will likely outperform me over a 20Y period, having spent minimal time scouring through research, and with a fraction of the stress. Framed in that way, one might wonder why someone would spend a considerable portion of their fleeting existence conducting this work, only to have a similar, or worse outcome, than that of the person who barely gives it a second thought. What could one do with all of that extra capacity?
To many, through their set of spectacles, that is a natural conclusion. But they don’t don my own set of frames. The truth is, that if I was an indexer, I’d still be studying companies. I’d still be infectiously curious about the psychology of the consumer, and the ever-fluxing state of the economy. As much as the goal is to be rewarded for my efforts over time (beating the market), this is a fate that is granted to few, particularly over a multi-decade time frame. I was talking about this subject with Siyu Li over a Zoom call only last week. There I admitted that one of the most profound joys that I derive from investing is the fact that it allows a naturally curious person to be perpetually curious. An outlet of sorts.
Whatsmore, I deeply enjoy that I get to view the world through this lens. After first studying business at the age of 16, I could no longer look at a high street (a term for a collection of businesses within a town, often the hub) the same way. After absorbing economics in my undergraduate years, I could no longer at the world the same way. After falling into a state of fascination for the stock market, I could no longer step into a Starbucks, or use a payment app without my mind pondering about the related company. The fact we wear these lenses becomes ever more apparent in social situations. You may notice occurrences like this in your own life. It might be that you use a slice of jargon that is not well-utilised in your current social setting, only to be met with blank stares. I spend so much time with people who obsess over investing, that when I hang out with friends who are not, I must subtly adjust.
I am sure this is true of more noble professions too. It’s the same infectious drive that has driven physicists, entrepreneurs, architects, and practitioners to change the world around us. Here I am, obsessing over balance sheets, whilst those people are truly altering the world. That’s the hand I was dealt, however, and it brings me joy. An investor may look at the world through one lens. A lawyer through another, and a doctor through one more. As such, when presented with an identical situation, each may derive an alternate meaning or conclusion.
This obviously expands outwith profession. Most people view the world as the result of their upbringing, their demographic, their geography, their race, their age, and their gender. The number of variables that shape our view of the world is incomprehensible. It may even be a matter of principle. The scarcity and abundance outlooks are a great example. The former believes we should save more of what we have, whilst the latter believes we should seek to earn more, period. The former is about risk avoidance, the latter would frame it as opportunity seeking. But even that is too simple, for each individual proclaiming to follow one of these mindsets, will have shaped that view from the extent of their history as a human being. The volume of variables is so large, that I don’t feel qualified to undertake the task of summarising them.
Cocktails are Great for Curious Beings
Sean Stannard Stockton recently appeared on the Business Brew, and there he explained why Ensemble Capital take anywhere from 6 months to one year to buy a company after first beginning the research process. It is not that it takes so long to file an initial report on the company but, rather, that Ensemble wishes to take advantage of our perceptual biases. He explains that once the mind becomes aware of something, in this case a business, then it begins to truly see the lattice of influence that this thing has on the world. Have you ever noticed that when you acquire a new car, you begin to see the model more often as you drive around? That’s the Baader-Meinhof phenomenon, often called the frequency illusion. But why does this happen? Let us take a step back.
The cocktail party effect is the name given to a phenomenon describing the brain’s ability to tune out the noise at a party and focus on the person’s voice with whom you share a conversation. The ability to focus one's auditory attention on a particular stimulus while filtering out a range of other stimuli. Should a second member enter the conversation, then you would focus on them too, because you are no longer filtering them out. Our brains do this subconsciously every day, blocking out stimuli which are deemed to not be of importance. Using Starbucks as an example. I am no psychologist but as an investor in Starbucks, when I stumble past one, my brain registers that interest and for a moment I become acutely aware of it. I see the cups on the floor as I walk around my city. I observe if people use the app when they pay for items in the store. The green siren calls out to me when I am near.
To a regular individual, they may also notice a Starbucks as they walk past it. But the brain won’t exert itself in the same way. It’s stimuli that need not be triggered, for it’s not believed to be of importance. Now, is my subconscious attention to Starbucks a good use of brain power? Likely not, all things considered. But it’s how my brain works. My point being, that when we make the conscious decision, as investors, that we are now interested in Company X, our brains, previously adopting the cocktail party effect on Company X, filtering it out, will begin to adopt the frequency illusion. We start to see the lattice.
In the case of Sean’s example, information that may have been filtered out previously will now be available (although, it always technically was) to the investor. We become more perceptive of that information. In Sean’s own words:
“Once you are aware of a company and are interested in it, you start noticing things that are relevant to it all around you. Our brain intentionally screens out information that’s not relevant to us so we can focus on what is relevant. But once you start looking at a new company, your brain is like ‘oh, well this stuff is relevant too’ and so suddenly it starts seeing information, in the market, in your everyday life and so it takes some time to do that.” - Sean Stannard Stockton, CIO at Ensemble Capital
Thus, another example of how our mind, and our behavioural biases, impact the lens through which we view the world. We could wander off into a discussion of how those biases may work against us. Common amongst investors is confirmation bias, the cocktail party effect but in a way that blocks out stimuli that contradicts our held opinion. This may cause an investor who is bullish to block out the bear thesis, as well as twist information to fit their own narrative. A Meta Platforms bull, for instance, may see data showing that the proportion of teens that own a VR device is quite high, but ignore the fact that only 5% of those who own a device are frequent users, with the majority (32%) seldom using it.
But that’s a discussion for another day. I believe I have covered what I wanted to say this morning, and wish you a great day.
Thanks for reading.
Author of Investment Talk